Equity Capital Update: BP
October 14th, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
The final article on capital and equity was posted at the end of July: Equity Capital: In Conclusion. Since then, one of the most written-up examples of the need for equity capital to cover adverse conditions has published 2Q10 financial results: British Petroleum.
The explosion on the Deep Water Horizon, killing 11 people; its subsequent sinking; the ruptured oil well; and wide-spread environmental damage has added huge expenses related to fixing and cleaning up the problem. It is for exactly these types of disasters that capital and equity are needed.
A quick review of BP’s 2Q10 results highlights the following:
Income Statement
● Production and manufacturing expenses*:
Increased to $38.0 billion (from a ~$6.0 billion quarterly run-rate)
● Taxation:
Received offsetting credit of ($7.2 billion) (from a ~$2.5 billion quarterly tax run-rate)
● Profit (loss) for the period:
Became a ($17.0) billion loss (from a ~~$6.0 billion quarterly run-rate)
*: Footnote to Production and manufacturing expenses:
“Second quarter and first half 2010 include a charge of $32,192 million in production and manufacturing expenses, and a credit of $10,003 million in taxation in relation to the Gulf of Mexico oil spill.”
Source: Excel download from investor relations portion of BP’s website; “Copy of FOI_quarterly_ifrs_full_book”
Balance Sheet
● Trade and other payables
Increased to $45.5 billion (from $38.1 billion at the end of 1Q10)
● Provisions
Increased to $13.4 billion (from $1.6 billion at the end of 1Q10)
● Other payables
Increased to $16.3 billion (from $3.2 billion at the end of 1Q10)
● Deferred tax liabilities
Increased to $11.0 billion (from $20.2 billion at the end of 1Q10)
● Total liabilities (includes the above items)
Increased to $162.3 billion (from $135.7 billion at the end of 1Q10)
● BP shareholders’ equity
Decreased to $85.5 billion (from $104.1 billion at the end of 1Q10)
Notice the Income Statement’s 2Q loss ($17.0 billion) and the Balance Sheet’s decrease in Shareholder equity from 1Q to 2Q: $18.6 billion.
Which re-emphasizes the desirability of having adequate equity-capital.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 84
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Trends: Why important?
October 7th, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
Trend reporting is important because it provides a dynamic component to the static “point in time” reports of the Balance Sheet (e.g., end-of-month/quarter/year) and “period in time” reports of the Income Statement (e.g., the month of July; the 3 Qtr; full year). Trends indicate how the financial numbers are moving over time.
Assuming comparable data, the longer the time period, the more insight that can be garnered.
In a very simple example, let’s say you have $10,000 to invest in the stock market. Which is more revealing:
● A single intra-day stock quote
● Three months’ worth of daily end-of-day closing prices
● Five years’ worth of daily end-of-day closing prices
● Five years’ worth of daily opening, intra-day, closing prices
These include peaks and troughs during each day
● Five years’ worth of daily opening, intra-day, closing prices; adjusted for actions affecting the stock such as splits
The more trend data you have, the more you will know about how the stock price behaves, when it goes up/down, and by how much. A graph of the data will indicate certain cycles, and will give hints as to which way the price may be heading. Of course, anyone in the market knows that:
1. “past performance is no guarantee” of future performance and
2. it is incredibly difficult to forecast tomorrow’s price
The point is that with a sufficient amount of history and comparability, you are in a much better position to have an informed opinion about where the price may be heading. Without the information, it’s like flying a plane from a cockpit that has no windows and no instruments. You can do it for a while but the likelihood of a crash goes up astronomically.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 83
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Finance: Measuring their performance
September 30th, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
Given what Finance people do, their accountability, and the information they use while doing their jobs, what are some of the ways to measure how well they are performing?
Given that Finance accountabilities cover significant internal and external ground, measuring their performance needs to include both. Here are a few common approaches, by the three major functions:
● Accounting
- Accuracy of booking entries
- Findings from internal and external auditors; regulators
- Promptness of the monthly close
- Timeliness of submitting regulatory and investor reporting
● Finance
- Accuracy of the financial plans
- Accuracy and business-relevance of variance/performance explanations
- Accuracy of the forecasts
- Timeliness of financial reports after accounting close
- Use of reports and analyses by business partners
● Market-related
- Net-profit from proprietary trading
- Amount of idle funds
- Adequacy of liquidity
- Net value of hedging activities
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 82
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Product Management: Measuring their performance
September 23rd, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
Given what Product Managers do, their accountability, and the information they use in performing their jobs, what are some of the ways to measure how well they are performing?
Given that Product Management accountabilities cover significant internal and external ground, measuring their performance needs to include both, irrespective of how much weight is given to the various components. Indeed, this weighting will depend upon each organization’s current situation, which will dictate what the most critical deliverables, and hence performance, will be (e.g., the weight given, at any particular time, to external benchmarks versus internal project milestones, cost control, risk mitigation).
Here are a few common approaches:
● Project deliverables
- On time
- On budget
- With the features & functionalities originally included in the project
● Availability
e.g., on a 24-hour clock, how much time is the product available to customers?
● Operational Service Level Agreements (SLA’s)
e.g., are specified times, timing, amounts fully met?
● Customer satisfaction
● Market share
● Profitability
Product Management may also share a few performance measurements with Sales, such as:
● Penetration
e.g., the degree to which a customer’s known business needs are being met by your company’s products and services
For example, a bank may be a counterparty with a corporation’s foreign exchange (FX) trading activity. Penetration is increased if the bank becomes the settlement bank for that corporation’s FX transactions.
● Share of wallet
e.g., the amount of a customer’s known spend-for-products/services is being met by your company’s sales to them
For example, a corporation might buy all of a particular raw material from one supplier; or a bank might handle all letters of credit for a corporation.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 81
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Sales: Measuring their performance
September 16th, 2010
Copyright © 2010 Integrated Profitability TM
(This article is published concurrently at the “Integrated Profitability” blog. Please visit for the full series of articles.)
Given what Sales people do, their accountability, and the information they use in performing their jobs, what are some of the ways to measure how well they are performing?
The task of measuring sales performance and the subsequent rewarding of that performance is a deep, board, and constantly changing topic. Sales people are exquisitely tuned to the structure of sales incentives and are very quick to adapt to the way any incentive program is structured to maximize their personal reward. Thus, the construction of sales incentive plans must anticipate the ways that the plan will cause sales people to react in terms of what, how, when, and to whom they make sales.
Here are a few common approaches:
● Amount of Sales revenue, based on signed contracts ($)
● Revenue growth ($ and/or %)
e.g., change in actual revenue booked from customers in the Sales person’s portfolio
● Closed deals
● Implemented deals
● Retention rates (# of customers; $ of revenue)
● New customers/relationships
● Lost business
● Penetration
e.g., the degree to which a customer’s known business needs are being met by your company’s products and services
For example, a bank may be a counterparty with a corporation’s foreign exchange (FX) trading activity. Penetration is increased if the bank becomes the settlement bank for that corporation’s FX transactions.
● Share of wallet
e.g., the amount of a customer’s known spend-for-products/services is being met by your company’s sales to them
For example, a corporation might buy all of a particular raw material from one supplier; or a bank might handle all letters of credit for a corporation
Finally, and of critical interest to the Sales people, there is the data that feeds directly into formal Sales Incentive programs to calculate performance according to the predetermined structure of the plan, and the calculation of the reward amount.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 80
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Outsourcing certain business functions
September 9th, 2010
Copyright © 2010 Integrated Profitability TM
The way in which companies staff themselves has changed dramatically in the past couple of decades. Many of the changes have been made possible by the advent of the internet and by huge advances in technology. At one point, seems like ages ago, companies internally staffed most functions needed to produce and deliver their products and services. For example, Ford owned Philco for more than a decade to supply radios for their automobiles.
As mentioned in “What to Do, Delegate, Outsource,” companies can take advantage of other companies whose business models focus on providing core services, especially in support and administrative areas, e.g.,:
● Payroll
● Financial bookkeeping
Outsourcing has expanded into infrastructure and operational areas:
● Customer Service
And there are what I would call hybrid-outsourcing arrangements:
● Commission-only sales
● Business process applications
e.g., car financing software packages or senior management MIS dashboards
Several areas are beyond the scope of this short article:
● The rapidly expanding SaaS (Software as a Service) market
● Equally rapidly expanding “cloud computing” applications
● A complete answer to the question: just because you can, should you?
The last question is essentially how to decide whether a company should outsource a particular function. That decision, which is not a trivial one, needs to consider two primary facets:
1. Cost/Benefit
should include both a financial quantification as well as a qualified review of impacts on your brand, quality, customer satisfaction, and long-term strategy
2. Risk
e.g., once outsourced, what could go wrong? What mitigation steps are necessary?
As with most business decisions, an “All-in” analysis, encompassing every aspect of your business that may be affected, provides the best answer.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 79
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Costing Methodologies
September 2nd, 2010
Copyright © 2010 Integrated Profitability TM
There is a continuum of costing methodologies. They range from “None” to frequently updated costing that is integrated with the daily business processes of a company. The continuum goes from “Simplest” to “Most Complex”; from “Least Detail” to “Most Detail”; from “Minimal Insight” to “Strategic & Tactical business-decisioning Insight.”
Here’s one way to view the possibilities:
Do nothing
● Do not spend time on costing work; rather, rely on intrinsic understanding of and familiarity with the business’ revenue, activities, and expenses
● This option works best when the business is simple, monolithic, and small
Use the general ledger reporting
a) As is reporting
● Use general ledger reporting as it comes off the presses: the financial reports automatically calculate net profit
● This option works best when the business consists of one, basically undifferentiated product line
b) With business-relevant normalizations
● Modify the general ledger numbers to remove financial impacts which have nothing to do with normal, ongoing core business activities
Do “Back of the Envelope” analysis
● Spend time dividing the company’s general ledger into the product and services to be costed. Use the 100% Rule to fully allocate all general ledger accounting lines.
● This option is best used when you need a quick, basic understanding of your company’s business by product, service, or other categorizations (e.g., customer segments; service tiers)
● Depending on the needs of the company, Back of the Envelope studies may be:
a) done one time
b) periodically updated
Implement a formal costing methodology
● Invest in one of the formal costing methodologies (see below for further resources) which, while requiring dedicated and skilled resources, also provides the most comprehensive, insightful, and business-decision actionable results.
● Once a costing process is in place, a company is faced with how to maintain the cost numbers. Several inputs to costing continually change:
- New products & services are created; some are retired
- Operational procedures and processing steps change
- Financial numbers change (every month)
- Volume of customer transactions change (every month)
● Here are a few ways a company could proceed:
a) Conduct a one-time costing effort
b) Periodically refresh the cost numbers (i.e., update with current expense dollars and transaction volumes)
c) Periodically re-do the costing (i.e., in addition to the dollar and volume update, re-calculate the detailed components of the costing process, including current products and services)
d) Integrate with ongoing company processes: basically, automating the process and embedding in how the company manages its business
If you are interested in delving more into costing for your company, here are some pertinent websites:
● bnet: The CBS Interactive Business Network
Alternatively, contact me and we can talk about what would make the most sense for your particular business and situation.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 78
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Expense Timing
August 26th, 2010
Copyright © 2010 Integrated Profitability TM
Accelerating the collection of revenue and postponing the paying of expenses have a positive, if temporary, impact on your cash-flow and profitability.
How much can your company affect the timing of expenses?
● Lagging payments
Pay as late as possible without incurring any fees or penalties
● Cash-discounts
When suppliers counter the first tactic above, consider taking advantage of discounts if you pay early; e.g., some jurisdictions offer discounts on property taxes; while some insurance companies tack on a 12% annual interest rate if you choose to pay via installments
● Payment terms
If you can, negotiate payment terms that let you pay bills within 30 (or more) days with no additional fees or finance charges
● Credit card statement cut-off dates
Know the cut-off or close date of your credit cards and, if possible, use the card just after that date and avoid using it during the days just prior to it. Depending on the terms of the card, doing so will give you an extra 30 days or so.
● Tax planning
Usually these provide temporary, one-time benefits. For example, the year I paid my whole property tax before December 31, I had more itemized deductions and, therefore, a lower tax liability. Of course, it was only a one-time timing benefit. Consult your tax accountant on any ideas in this area.
Bottomline:
● Expense timing events are only temporary and one-off
● Expenses that produce high returns are clearly a much better focus of management attention
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 77
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Pricing approaches
August 19th, 2010
Copyright © 2010 Integrated Profitability TM
Here are a few methodologies used to price products and services:
● Cost-plus
Definition: using your expenses as the basis of your price
How to do: add up all your costs and tack on a profit margin
Pro: all products and services will be profitable (assuming they sell)
Con: neither sales nor profits will be maximized. If the resulting price is too high, sales will not happen. If too low, your profit will be lower than it could have been.
● Competition-related
Definition: using information from your competition as the basis of your price (e.g., their prices, pricing, product & service offerings)
How to do: gather competitor information and mimic their prices
Pro: prices will be competitive
Con: your products and services will not be able to reap the benefit of any differentiating advantages or counter adverse impacts of any differentiating disadvantage
● What the market will bear
Definition: using the current “realized-prices” in the market as the basis of your price
How to do: keep raising prices until sales stop
Pro: prices will be maximized
Con: sales and profits will probably not be maximized; customer loyalty may be damaged
● Marketing-based
Definition: using your marketing objectives as the basis of your price
How to do: within the context of your marketing goals, ensure that every price supports them (e.g., growing market share might mean lower prices; protecting a premium brand might mean higher prices)
Pro: strong and consistent branding
Con: may ignore financial realities
● Strategy-based
Definition: using your company’s strategy as the basis of your price
How to do: within the context of your strategic goals, ensure that every price supports them (e.g., sun-setting an older product might mean milking prices for as long as possible; use prices to differentiate between two products or features so that consumers naturally tend to purchase the one most strategically aligned)
Pro: coherent and integrated pricing will help meeting strategic objectives
Con: short-term opportunities may be forsaken
● Combination of all above
Definition: using a combination of all the above methodologies to decide your price
How to do: integrate information and approaches from all methodologies
Pro: tends to result in the best short- and long-term profitability results
Con: resource intensive
Assuming you have the time and the skills, having a pricing methodology that directly supports all business aspects (e.g., costs, competition, marketing, branding) to the maximization of the company’s long-term profitability is best.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 76
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
Revenue recognition
August 12th, 2010
Copyright © 2010 Integrated Profitability TM
Revenue recognition is an accounting discipline. The observations below are not from an accountant and should not be relied upon as such. Rather, they are higher-level thoughts on how one can think about revenue and its drivers and challenges.
Monetary-based
How are prices paid by customers?
● Cash
● Credit Card
● Check
● Terms (account receivables)
Obligation-based
Revenue is recognized when an obligation to pay is created. Actual payments may be based on different event-triggers:
● Signing of contract
● Work in Progress
● Delivery of goods/completion of service
Cash basis vs. Accrual basis
Businesses need to consistently use one or the other basis for their financial books:
● Cash: revenue is recognized when you have the cash: without any possibility of it being reversed.
● Accrual: revenue is recognized the moment someone has a legally-enforceable obligation to pay you
Business conditions
The following are related to pricing and/or revenue:
● Discounts: a lowering of price prior to a sale. As such, the discounted portion cannot be revenue since the customer never had an obligation to pay that amount.
● Rebates: a return of part of the price collected. As such, rebates are negative revenue. To be accurate, the concept of “realized price” must be the amount after the rebate.
● Refunds: a return of an item purchased that results in a partial or full refund of the amount collected. In this case, price is unaffected; the refund is negative revenue.
● Non-payment: when the customer does not pay the price. On an accrual basis, the original sale price is booked as revenue, and the ultimate realization that the price will not be collected will cause an entry of negative revenue. On a cash basis, you never had anything to book.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 75
Telephone: 925-202-6244
Copyright © 2010 Integrated Profitability TM
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